02/02/2011: Credit and Deposits of Irish residents: January 2011

Let's get back to the credit stats released yesterday by the CBofI. This is the second post (earlier post - here - focused on foreign depositors flight), so let's update the core charts and review some monthly changes in the data.

Credit side:

• Irish households credit contracted mom by €948mln in January 2011 (a drop of 0.73%) against a monthly contraction of 5.29% in December 2010 - so deleveraging has slowed down
• Year on year, Irish households total outstanding debt fell to €129,370 mln in January 2011 or yoy decline of €10,392mln (7.44%) while in December yoy decline was 6.97%.
• Irish household's outstanding mortgages amounted to €99,289mln, down in January by €289mln (-0.29%) against a monthly drop of 7.05% in December 2010
• Year on year, mortgages were down 9.78% (or €10,766mln) in January against a yoy decline of 9.65% in December 2010.
• Non-financial corporations outstanding debts amounted to €92,652mln in January up 0.1% mom (+€90mln), but down 35.67% yoy (-€51,363mln).
• Total private sector credit fell 0.57% (-€1,908mln) mom in January (December 2010 saw mom decline of 0.98%) and fell 10.6% yoy (-€39,427mln) in January (December 2010 saw yoy decline of 10.73%).

So on credit side by category:
And growth rates:

Next, deposits for Irish residents (remember - non-resident deposits were highlighted in the previous post linked at the top):

• Total private deposits down 0.82% mom (-€1,387 mln) in January and yoy down 9.05% (-€16,613 mln). Steep. Deposits were down 2.24% mom in December 2010 (8.41% yoy).
• Households deposits contracted 0.7% mom in January (-€663mln) and 5.56% yoy (-€5,531mln). There go our 'savings rates', folks. In December 2010, yoy drop was 4.57% so things are accelerating downward. Month on month deposits were down 0.71% in December 2010.
• Non-financial corporations deposits rose 0.12% (VAT carry overs and seasonal receipts and payments, especially for MNCs being most likely drivers) month on month (+€41mln), but were down 16.57% yoy (-€6,670mln). In December 2010 corporate deposits were down 4.93% mom and 17.42% yoy.
  

Now, let's consider the degree of leverage we carry in this economy:
As charts above show:

• Leverage rose 0.26% mom and fell 1.7% yoy in January 2011 across the entire economy. In December, leverage rose 0.51% mom and fell 3.44% yoy
• Overall leverage trend is up and currently this economy is leverage 199.32%
  
• For households, leverage fell 0.03% mom and 1.99% yoy in January 2011, having fallen 0.04% mom and 2.79% in December 2010. So deleveraginng is slowing down
• Currently Irish households are leveraged 137.69%
• Non-financial corporations leverage was formidable 275.93% in January, down 0.02% on December 2010 and 1.99% on January 2010. In December 2010 corporate leverage was down 0.04% mom and 2.79% yoy. So deleveraging is slowing down for corporates as well.

Deposits composition by maturity:
Clearly, longer maturity has fallen off the cliff and a slight bounce in longer maturities this month follows a catastrophic drop off in months before. This cliff is a clear indication that households are moving cash into shorter maturities - either to withdraw deposits all together or as a form of short term precautionary savings. So:

• Overnight deposits were down -0.9% (-€788mln) mom and -4.42% yoy (-€3,998mln) in January
• Deposits with maturity up to 3 months were down -1.26% (-€197mln) mom and -6.16% (-€1,011mln) yoy in January 2011
• Deposits with maturity up to 2 years were up 1.15% (+€780mln) mom and down -16.67% (-13,374mln) yoy.

Finally, credit cards debt fell 1.84% mom (€53.48mln) and -5.8% (-€175.81mln) yoy in January 2011. Good news for one of the most expensive forms of debt.

02/03/2011: Live Register February 2011

Live register for February is out today and makes for some interesting reading.

Headline figures are mildly encouraging. In February 2011 there were 444,299 people on the Live Register an increase of 7,343 (+1.7%) yoy. This compares with an increase of 5,741 (+1.3%) in the year to January 2011 and an increase of 84,503 (+24.0%) in the year to February 2010.

On a seasonally adjusted basis there was a decrease of 1,700 on the Live Register in 2011. M decrease of 5,800 was recorded in January 2011.

Overall the Live Register has now fallen by 10,000 on a seasonally adjusted basis since its peak in August/September 2010.

Let's update some charts:
To put the LR changes into perspective, consider weekly average changes:
and monthly averages:
Live Register-implied unemployment rate (pretty good measure of unemployment) is now at 13.5% - same as in January:
Now to some numbers in more detail:

• Year on year January 2011 saw increase in LR of 19,300. This has fallen back to 17,800 in February;
• In percentage terms, yoy change in LR in January was +4.522%, which eased to +4.150% in February
• For 25+ year olds, January LR increased by 10,000 year on year (+2.879%), while February increase was 11,300 (+3.272%) - so things are getting better here, but by only 600 mom
  
• For <25 year olds, January 2011 saw a decrease in numbers of 3,400 (-3.908%) yoy, but February decrease was 2,600 yoy (or -3.055%) - an improvement mom of 1,100
  
• Casual and part-time employment increased 5,770 in February (yoy) or +7.277% against an increase of 6,369 in January (+8.286%) - or mom increase of 1,827 (more people taking part time and casual work than the seasonally adjusted drop in overall LR)
• Non-nationals accounted for 79,162 of the total LR count against nationals with 365,137. So non-nationals count increased 635 month on month in February, while nationals saw an increase of 987.
• Non-nationals LR signees numbers fell 2,868 yoy in January (-3.524%) and by 2,104 (-2.589%) in February
• Nationals signees numbers increased 8,609 yoy in in January and 9,447 in February
• The above points on nationals v non-nationals signees imply rather rampant emigration or outflow from the labour force of non-nationals.

All of the decrease in the seasonally adjusted series over the last six months has been recorded for males.

One core problem has been the increasing duration on LR. Month on month, February saw an increase of 2,413 males and 858 females (total of 3,271) of signees on the LR for a year or longer. This contrasts with decreases of 2,610 males and and increase of 961 females with duration under 1 year. This suggests that the unemployment is, predictably, sticky for earlier LR signees.

Finally, separate figures released today by the Dept of Enterprise, Trade & Innovation show that notified redundancies were down 44% year on year in February. In addition, as reported earlier, PMIs for Manufacturing have signaled for the third month running that employers are starting to add jobs in the sector. These two developments suggest that barring some significant shocks, LR is now stabilizing and possibly reverting to a shallow downward trend. This trend, however, still appears to be driven by exits and emigration, rather than jobs creation.

02/03/2011: CB data - Total deposits

In the next few posts I will be covering the data released yesterday by the Central Bank.

Here are two telling charts rarely seen side by side:
Let's spell out some numbers:

• Total deposits from non-residents fell 36.35% year on year in January 2011 (€190.88bn) and 3.71% mom (€12.685bn)
• Private sector deposits from non-residents fell 22.89% yoy (€22.888bn) or 0.79% mom (€0.616bn)
• Total private sector deposits from Irish residents declined 9.05% yoy (€16.613bn) and 0.82% (€1.6387bn) mom
• No media outlet to my knowledge told us just how much distrust in our financial system do foreigners have
  

01/03/2011: Manufacturing PMIs

From NCB Manufacturing PMI report:

“Manufacturing production increased at the third fastest pace in the history of the survey, which began in May 1998. According to respondents, higher output mainly reflected strong new order growth.

Total new business rose at the sharpest pace in more than eleven years in February. New export orders expanded at the second-steepest rate in the series history, with the EU and Asia highlighted as sources of growth.

The second consecutive accumulation of backlogs of work was solid, and the fastest in the history of the series, in line with strong new order growth.

Employment growth hit a four-and-a-half year high in February as firms raised staffing levels in response to higher workloads. Job creation has now been recorded in each of the past three months.

Input cost inflation accelerated for the second month running to the steepest since July 2008. Higher prices for raw materials was the main factor behind increased input costs, with fuel and steel mentioned in particular.

As input prices rose, Irish manufacturers increased their charges accordingly. Furthermore, the marked inflation of output prices was the sharpest in four years.

Purchasing activity increased at the fastest pace since December 1999 in February, in line with rising production requirements. Anecdotal evidence suggested that suppliers had struggled to cope with rising demand for inputs, resulting in delivery delays.

Lead times lengthened markedly again over the month.

Despite a near-record rise in purchasing, preproduction inventories decreased modestly as inputs were consumed by production. Stocks of finished goods also declined in February, albeit only marginally. Panellists reported that post-production inventories were utilised to partly satisfy the sharp rise in new orders."

Nothing to add to this – across the board, strong performance and most encouragingly, expansion in employment prospects is holding over time and even getting stronger.

Perhaps one suggestion going forward - can the folks from NCB get us a breakdown of MNCs led activities from domestic respondents going forward.

Now, updated charts:

28/02/2011: Retail sales for January

Headline stuff: the volume of retail sales (i.e. excluding price effects) increased by 4.6% in January 2011 when compared with January 2010 and there was a monthly decrease of 3.8%. Now, wait, that sounds good?

Not really. Let’s take another shot at that statement: volume of retail sales was up 4.6% yoy in January 2011, but it was down 3.8% on December 2010. In fact, it was down for the third month running, having declined 0.6% in November, then 1.9% in December and now 3.8% in January. The rate of decline is accelerating so far. And at a massive speed: x3 times in November-December and at x2 times in December-January. (Mrs G is putting that bubbly back in the fridge right now).

But what about the value of sales? Remember – CSO likes volume indices cause they tell you how much physical stuff was shifted through the stores. But let’s not forget that retail sales jobs and businesses depend not on volume, but on value of stuff being sold. Exactly the same picture here as in the case of volume. Value of retail sales was up 4.0% on January 2010, but it was down for the third month running (-1.5%) in monthly terms.

Let me toss in another factoid here. December sales were extremely poor in 2010, but not so much in 2009. In fact, December 2010 value of sales was down 4.0% on December 2009. So the rush post-Christmas into sales was much shallower in 2010 than in 2011. Hence, the current ‘boom in retail sales’ announced today by CSO is nothing more than a compensatory run onto the post-Christmas sales racks. (Mrs G is now putting away the celebratory bottle of Sprite back into the fridge).

And one more point – the value of sales index has been artificially boosted by rampant price inflation in several categories of sales where prices are state-controlled or subject to commodities price inflation (see below).

Now to updated charts:
You can see what I meant by the spin above and below (notice the divergence of monthly and annual rates of change):
And just in case you want to see it: relative to peak retail sales are still declining
Faster rate of decline in the volume, of course, is due to rising prices (as mentioned above).

Now to ex-motors sales (or core sales):
Ok, now, if Motor Trades are excluded, the volume of retail sales decreased by 1.2% in January 2011 when compared with January 2010, while there was a monthly increase of 2.7%. Value of sales rose mom 2.6% although year on year there was a decline of 1%. Both value and volume of core sales broke two months declines in November and December. And this is good news. Relative to peak, value of sales is now at 82.21% (up from 80.10% in December 2010) and volume of sales is at 86.5% (up from 84.19% in December 2010). Last time value of sales was at this level was in June 2010 and volume – in November.
And take a look at the detailed sub-categories of sales:

• Motor trades - -4.2% in value and -3.5% in volume, so either we are buying cheaper and cheaper cars (in fewer numbers) or prices are falling faster than sales;
• Department stores down 12% in volume (mom) and 12.3% in value - symmetric drop-off as sales prices continued through the month;
• Fuel - volume of sales is up 0.9% mom (down 1.4% yoy), but value of sales is up 2.8% mom and 10.4% yoy - as mentioned above - inflation, folks is biting;
• Non-food business excluding motors, fuel and bars - now, here's the real retail sector story: -0.6% mom and -4.0% yoy in value of sales, and -0.9% mom and -1.5% yoy in volume - deflation and shrinking sales means recession continues.
• Of course, our massive newsflow has boosted Books, Newspapers and Stationery category - +4.9% mom in January in value and +2.7% mom in volume;
• Lastly, in tune with the nation watching Vincent Brown and other current affairs programmes, we've invested heavily in furniture and lightning - up 9.5% mom in value and 9.3% in volume
  

28/02/2011: Ireland v Iceland: Economy, part 2

In the previous post I covered some of the macroeconomic differences between Ireland and Iceland. One core conclusion that can be drawn from the previous post is that while Ireland retains stronger longer-term economic foundations based on historical performance, these foundations are not sufficient for us to achieve better performance than Iceland in the current crisis.

One might wonder what is the reason for this. Let’s recap how both countries have arrived into the current situation.

Both Ireland and Iceland have experienced rapid collapse of their asset markets (in both, there was a property bubble and a general financial services bubble, albeit Iceland had much smaller property sector than Ireland and in another crucial difference, Iceland had IFS bubble, while Ireland experienced a domestic financial services implosion). Hence, both economies started from roughly speaking similar conditions.

The crucial difference between the two can be found in the responses to the crisis. Iceland defaulted on its banks liabilities, writing them off the country economy’s balancesheet. Ireland took the entire banking sector liabilities and loaded it onto the shoulders of its economy.

This story can be traced through the fiscal positions comparatives.
Chart above shows that the two countries have run significantly different fiscal policies through the crisis, with Government revenues deteriorating much more sharply during the early stages of the crisis in Iceland than in Ireland. From the peak of 47.671% in 2007, Iceland’s government revenues fell to 39.447% of GDP in 2010 and are expected to reach the lowest point of 38.464% of GDP in 2011. In the mean time, Ireland’s government revenue fell from 35.83% of GDP in 2007 to 34.423% in 2009 and then rose to 35.362% in 2010. Ex-ante, this suggests that Irish Government balance should be more benign than that of Iceland.

The above conclusion is supported by the data on Government expenditure above. Both countries peaked in terms of their Government spending in 2009 (Iceland at 52.09% of GDP) and 2010 (Ireland at 53.03% of GDP). But in terms of starting points, Iceland was in a much worse shape than Ireland with total expenditure in 2007 at 42.27% of GDP as opposed to Ireland with 35.78%.

However, the ex-ante expected deeper deterioration in fiscal positions for Iceland turns out to be incorrect.

As the chart above clearly shows, Iceland’s public net borrowing requirements were much more benign and are expected to be much shorter lived, than those of Ireland. In 2007 Ireland’s net lending stood at 0.051% of GDP, while Iceland posted a lending surplus of 5.402%. In 2009 Iceland hit the rock bottom in terms of its Government borrowings at 12.644% of GDP. But Ireland kept on going: from the net Government borrowing of 14.613% in 2009, we fell to 17.667% in 2010. By 2015 Iceland is expected to enjoy three years of surplus and its forecast government net lending in 2015 is set at 2.757%. Over the same time, Ireland will remain firmly in net borrower hole, with 2015 net government borrowing expected at 5.153% of GDP.

Much of this gap between Ireland and Iceland is accounted for by the liabilities assumed by the Irish state from its banking sector. Stripping out Government interest bill – again massively overextended by the banking sector rescue funding, primary net lending/deficits of the two governments are shown in the chart below.


Now, let’s take a look at the overall public debt levels. First the IMF data
It does appear that Irish Exchequer, despite having run smaller surpluses in 2004-2007 and despite having suffered much deeper crisis in the banking and own balancesheets is going to end up holding less debt than Iceland. This, however, does not reflect the quasi-Governmental debt, which relates to banks rescue packages and which in Ireland adds to at least 25% of GDP ion today’s terms while in Iceland the same debt adds up to nothing courtesy of their decision to default on banks liabilities.

The chart below corrects for this omission.
In fact in its recent assessment of the Irish economy prospects for recovery, the IMF stated that they expect Irish Government debt to GDP ratio peaking at over 120% and in the case of an adverse economic growth scenario – reaching possibly 150% of GDP.

Finally, here are the summaries of data from the IMF comparing two economies performance.

First - period averages:
And finally - starting year spot values:

27/02/2011: Ireland v Iceland: Economy, part 1

This is the first post of two dealing with comparatives between Irish and Icelandic economies during the ongoing crises. The post was motivated by a number of recent articles in Irish press presenting Irish situation in terms of the allegedly stronger crisis performance than Iceland, as well as Paul Krugman's response to these (here). This post will deal with real economy comparatives, while the second post will deal with fiscal performance relatives.

Both economies experienced deep crises in 2008-2010: Icelandic economy contracted to 90.41% of 2007 levels by the end of 2010, while Irish economy declined to 92.13%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 103.12% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. However, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold.

In terms of real GDP per capita Icelandic economy contracted to 88.64% of 2007 levels by the end of 2010, while Irish economy declined to 91.08%. Per IMF Q4 2010 forecasts, Icelandic economy is likely to reach 98.05% of its 2007 level GDP by 2015 while Irish economy is expected to reach 106.10%. Again, latest revisions to 2011 forecasts (but not yet to 2011-2015 period) suggest that this advantage of the Irish economy over Icelandic economy is unlikely to hold in the next IMF database updates.

In terms of GDP based on purchasing-power-parity (PPP) per capita, Current international dollars, Irish economy has contracted by 10.25% in 2010 relative to 2007, while Icelandic economy declined by 7.75% - much less. Why? This result is especially worrisome, given that over the same period Irish economy experienced deep deflation (see below), while Icelandic currency was devalued substantially. Thus, Irish purchasing power should have risen, while Icelandic purchasing power should have fallen. And yet, real purchasing power of Icelandic income earners held up better than that of Irish counterparts.
In projections through 2015, the IMF expect that per capita, PPP-adjusted GDP in Iceland will reach 10% above 2007 levels, while in Ireland it will reach 7.58% above 2007 level. This, once again, means that the IMF expect Icelandic income earners to fare better than their Irish counterparts.

The same is reflected in the gap between GDP per capita in Ireland and Iceland. This gap stood at 3,487.63 in favour of Ireland in 2007. By 2009 it fell to 832.61 and by 2010 rose to 2,135.11 still below 2007 levels. According to IMF projections, the gap is expected to be 2,788.53 by the end of 2015. Notice that the average gap between 2008 and 2015 will remain below its historical average levels for 2000-2007. This confirms that much of the underperformance in terms of absolute real GDP per capita discussed above is due to (1) historical trends and (2) price differentials between the two countries.

What about economic performance in the two countries relative to the global economy? Chart below shows the shares of each economy in total global GDP. In 2007, Iceland accounted for 0.019% of the world GDP, while Ireland accounted for 0.268%. By 2010 these shares were 0.016% and 0.237 respectively. The decline in Iceland was 15.79% and in Ireland 16.55%. So Iceland outperformed Ireland here.

By 2015 IMF expects Icelandic economy’s weight in the global economy to be 0.015% - a decline of 21.05% on 2007. For Ireland the same forecasts imply 0.215% weight in the global economy and a decline on 2007 of 24.30%. Again, Iceland is expected to outperform Ireland into 2015 in these relative (to global economy performance) terms.

Comparatives with Iceland aside, however, Irish economy is expected to reach, by 2015, virtually identical level of global economy share as it enjoyed between 1996 and 1997, in effect erasing the entire period of some 20 years worth of economic growth.

As I mentioned before, Ireland clearly showing real deflation trend during the crisis, which is not the case for Iceland (in part, Icelandic inflation reflects devaluation of its currency).
It is worth noting that moderation in Icelandic economy inflation has been dramatic and highly orderly since 2008-2009 peak. This shows that the economy is expected to be adjusting through its post-default and post-devaluation period in an orderly fashion. In contrast, Irish deflation during the crisis has been pronounced and persistent.

Now on to unemployment. It is clear that Irish unemployment is running at the rates more than 50% above those in Iceland. By the end of 2015, IMF forecasts Irish unemployment to be 9.5% and Icelandic unemployment to be 3.12% or more than 3 times lower than that in Ireland.
Again, note the dynamics of expected adjustments to peak unemployment in the two countries. IMF clearly forecasts unemployment to decline in Iceland at a much faster rate than in Ireland. Given that icelandic unemployment declines are more likely to arise from jobs creation, rather than emigration, while Irish unemployment declines are robustly influenced by rampant outward migration of displaced workers, these dynamics also reflect the deeply-troubled nature of the Irish economic crisis, when compared with that of Iceland.

Which, in turn, shows that more likely than not, stronger Irish performance in GDP growth terms above is really driven by the MNCs and their transfer pricing, rather than real economic activity at the domestic economy. Lest I be accused of voicing anti-MNC sentiments - we do live in a society where saying factual things can get us labeled anything totally unrelated to the factual evidence presented - MNCs activities are great. All I am suggesting is that counting on them to carry us out of our real economy collapse (unemployment, shrinking employment, declining real disposable incomes etc) might be a bit naive.

Although IMF provides no forecasts for employment numbers after 2011, we can use population statistics and employment numbers through 2011 to compare two countries in terms of employment rates as percent of total population. In 2007 51.76% of Icelanders were in employment – a percentage that declined to 45.20 in 2010 and is expected to fall to 45.09% in 2011. In Ireland, 2007 employment rate was 48.93%, and this has fallen to 41.18% in 2010 and is expected to be 41.33% in 2011.
Again, in terms of employment rates Ireland is far behind Iceland – a sign that although out workers might be more productive (with a large share of this productivity accounted for by the transfer pricing by the MNCs), we tend to have smaller share of people working.

Do notice that the Icelandic economy performance in terms of employment takes place against the backdrop of having younger population than Iceland. Over the period of time covered, Iceland showed relatively stable rate of employment, while Ireland posted dramatic increases in employment rates during its growth period. This means that our current performance in terms of employment rates cuts against our demographic trends, while that of Iceland is in line with their demographic structures. In other words, one could have expected a decline in Icelandic employment rates even absent the crisis, while we should have expected continued increase in Irish employment rates absent the crisis.

In terms of external trade, both countries have improved their chronic current account deficits throughout the crisis. However, the great exporting nation of Ireland have seen much more shallower improvements than those found in Iceland. Krugman makes exactly this point in his article (linked above), but he considers net exports instead of the current account.
Chart above shows that between 2007 and 2010, Icelandic current account deficits fell from 16.29% of GDP to 0.91%. The Icelandic current account deficits are expected to continue declining through 2015, reaching forecast 0.38% of GDP by 2015. In Ireland, 2007-2010 decline was from 5.24% to 2.73%, while by 2015 the current account deficit is expected to fall to 1.24%.

The reason I prefer using the current account is because of several reasons:

1. As I have argued in a different post (here), current account can be used as a metric of our ability to repay debt out of trade surpluses, once we account for transfers abroad to pay dividends and profits on earnings by the foreign investors into Ireland, including the MNCs, take in our own investors earnings from abroad etc
2. Current account does not mask the extent of transfer pricing on our net exports
3. Current account also links to Government debt costs and thus lends itself naturally to the second post to follow
   

As we show in the next post, much of the reason for better external economic balance performance of Iceland is due to lower transfers from Government to the foreign bondholders, s Icelandic debt is expected to perform much better through the entire crisis. This means Icelandic current account is going to be relatively stronger than Irish one, as Ireland is expected to lose increasingly larger share of its economy to payments to foreign debt holders in years to come.

Next post will cover Government/fiscal policy performance of the two countries.

19/02/2011: Paying down our debt out of Exports

Let's do a quick exercise. Suppose we take our current account - defined as the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid and remitted profits). Suppose every year we use the current account balance solely for the purpose of repaying our Government debt. How long will it take us to do so.

Let us start with some notes on methodology.

Our current account is in deficit - since 2000, there was only one year - 2003 - when we had a surplus in the current account (charts below), which really means our external trade was not enough to generate a surplus to the economy. So let us assume that the we can reverse this 180 degrees and that the deficits posted in 2009-2010, plus those projected by the IMF to occur in 2011-2015 are all diverted to pay our Government debt.
Notice - this is impossibly optimistic, as our Government does not own current account, but suppose, for the sake of this exercise that it can fully capture net profits transfers abroad and cut the foreign aid to zero, plus divert all interest payments on own debt and private external debts to repayment of the principal on own debt.

Secondly, assume that only Government debt is taken into the account (in other words, we assume away Nama debt, some of the quasi-sovereign financing of the banks resolutions, and all and any potential future banks and spending demands in excess of the EU/IMF assumptions, as well as all future bonds redemptions - the latter assumed to have a zero net effect at roll-over, so no added costs, no higher interest rates, etc).

In other words, here is what we are paying down in this exercise:

Now, suppose we take current account balances for 2009-2015 (projected by IMF) as the starting point. The reason for this choice of years is that they omit fall-off in our exports in 2008 and also the bubble years of 2004-2007 when our current account imbalances were absurdly large due to excessive outward investment and consumption of imports.

Next, assume:

• We deal with present value of the debts
  
• We apply an average 3% annual growth rate to repayments we make (current account transfers grow 3% on average per annum)
  
• Currency effects are removed (so we use flat USD1.33/Euro FX rate throughout)

So here is the result:
And the conclusion is: if Ireland diverts ALL of its net current account (2009-2015 IMF projections taken at 3% average growth rate forward) to pay down Gov debt, it will take us until 2064 to reach 2007 level of official (ex-Nama+banks) Government debt.

Note: incidentally - the charts tell couple of interesting side-points based on our historical debt path:

The Government told us that we are not in the 1980s - as we had much higher levels of debt then. Ok, the figure above shows that as of 2010 - we ARE back in the 1980s: 2011 debt will equal as a share of GDP that attained in 1989. According to IMF database, our debt has peaked at 109.241% of GDP back in 1987. It is projected to be 104.7% in 2013. Not that much off the peak.

But, of course, in the 1980s there was no quasi-Governmental debt - the debt of Nama, some of the banks recapitalization measures and the debts that still might arise post-2013 from the Government banks Guarantees and resolution schemes. If we add Nama's 31bn worth of debt issued, this alone will push our 2011 debt levels to 121.8% of GDP and factoring in coupon rate on these, but 2015 our Official Gov Debt + Nama will stand (using IMF projections again) at 124.8% of GDP - well in excess of the peak 1980s levels of indebtedness.

Secondly, despite what any of us might think about the Celtic Tiger years, the Government never paid down the old debt, it simply was deflated by rising GDP. Which suggests that even during the Celtic Tiger boom years - our exporting economy was NOT capable of paying down actual debt levels.

16/02/2011: Banks issuing loans to themselves

Note from the banks front:

ECB’s printing machine keeps working over time. Greek and Irish banks have issued at least €70 billion of bonds to themselves to create the collateral required to get cash from the ECB before last week. Then, Greeks announced they will issue €30 billion more unsecured bonds to themselves for the purpose of pawning these at the ECB. The European Central Bank's balance sheet now funds the equivalent of 18% of Greek banking sector assets, 15% of Irish and 7% of Portuguese. CBofI holds another 7%.

Some amazing 'innovation' on financial front this is.

16/02/2011: Heading for another round of crisis pressures?

Two nice charts, lest we forget where the crisis is at:

Greek 10y sovereign bonds:
And Irish 10y sovereign bonds
Both courtesy of Goldcore, both are daily yields over 1 year.

13/02/2011: What a Jeopardy champ can do in the world of finance

Here is my article along with Shanker Ramamurthy that was published last Thursday in the American Banker, discussing IBM's Watson super computer system's potential applications in the financial services industry - helping to advance industry thinking on how in the era of "big data" only advanced non-linear analytics can make sense of structured and unstructured data flows to transform it into valuable insights.

VIEWPOINT: New Computer, New Modeling Possibilities
By Shanker Ramamurthy and Constantin Gurdgiev
February 10 , 2011 - p8

Next Monday a new IBM computer system called Watson will battle two quiz-show champions in a game of Jeopardy! There is more at stake here than winning a game. The potential applications of this technology to transform the operations of industries such as health care, government and finance are enormous.

In the financial services industry, integrated risk management is an everyday struggle. Financial practitioners and supervisory and regulatory authorities must make split-second decisions using information coming from all sides: the Internet to corporate and call center channels.

The challenge is to efficiently process diverse data streams and pick out relevant data insights to apply to strategic business and regulatory decisions.

In the banking industry today, data "fuzziness" abounds. Uncertainty exists about the quality of data, assumptions and models that are being used to make judgments. This, of course, clouds the true picture of risk and biases our decision-making, often in econometrically undetectable ways.
Most banks today run risk models on a discrete and disaggregated basis while relying on often subjective assumptions. High-performance computing advances, represented by Watson's capabilities, can rectify this - by providing visibility into concentrations of risks and risk-related activities, as they happen. Simultaneously, it deploys nonlinear analytics in selecting both the statistically and operationally important scenarios.

The beauty of a nonlinear computer that "learns" is that it can analyze a complex set of implied possible scenarios and give answers to the broadest set of questions. This potentially can lead to the emergence of analytical systems that not only report on probabilistically likely events but also identify latent "Black Swan" events and even sense deeper levels of uncertainty.

For example, a legislative decision altering a specific set of financial strategies can have no impact on traditional linear models because the outcomes can be weighted by an extremely low assigned or assumed probability. But in a nonlinear world, such an outcome can still be testable as part of the selection list for reporting. More importantly, it can be made recognizable by the analytic system and, therefore, objectively reportable.

A system like Watson has the potential to get answers to incredibly difficult questions about strategic decisions, risks and market changes that can otherwise be elusive.

For example, it has the ability to create an interactive risk-pricing system using a menu of models that evolve as the system learns, detecting structural breaks in data before analysts can spot them and build them into existing programs.

Of even more significance, Watson will be able to deliver scenario analysis based not just on either event probability or expected loss/gain but also on more complex company objectives.

This can involve analyzing corporate strategy inputs, including non-quantifiable questions, alongside fully quantifiable inputs. Imagine asking a computer "How do I increase my loan book profit margin by 10%?" or "What actions can I take to strengthen my capital reserves, with minimum impact to my asset base?"

At a much deeper level, the nonlinear learning capabilities that Watson pioneers can lead to the creation of systems that are able not only to handle traditional risks and their interactions but also to evolve into systems capable of transforming deep uncertainty into explicit models. Though still some years away, this could mean an artificial intelligence able to sense Donald Rumsfeld's famous "unknown unknowns," converting them into specific models suitable for risk analysis and getting meaningful, actionable responses.

The real-time, decision-making capability that is so sought after in the financial industry will be a crucial, competitive differentiator.

As risk intensifies within interconnected global markets, the complexity and exploding volumes of data will only rise.

Shanker Ramamurthy is the general manager of banking and financial markets at IBM Corp. Dr Constantin Gurdgiev is the head of macroeconomics in the Center for Economic Analysis at the IBM Institute for Business Value.

13/02/2011: IMF's statement on Iceland

I twitted about the latest conclusions from the IMF on the state of Icelandic economy post-banks collapse. Here are the exact details of the IMF statement and the statement itself. Emphasis and comments in brackets are mine:

"Financial sector restructuring is moving forward [in contrast, one may add to Ireland's]. Savings banks and non-bank financial institutions are being recapitalized [in Ireland's case, recapitalizations of the banks have been predominantly wiped-out by the continued writedowns, so net increases in actual capital have been negligible], and the supervisory framework is being strengthened by amendments that will be enacted in the coming months [no serious far-reaching amendments have been introduced in Ireland since the beginning of the crisis and the marginal ones that were are yet to be enacted].

"Moreover, recent agreements to restructure the debts of households and small enterprises will help put households, corporations and banks on a more secure financial footing, which is essential for a sustainable recovery [this stands in contrast with what has been happening in Ireland. In addition this directly and indisputably puts the blame for the policy errors in the Irish case onto our Government and EU shoulders, for it is clear that within the EU/IMF deal framework, the IMF was basing its policy proposals on their experience in Iceland].

“Policy discussions focused on the strategy to liberalize capital controls, fiscal and monetary policies, and financial sector reforms [none of these issues are even on our agenda].

Here is the actual press release from the IMF